Chapter 8

Economic Integration

Learning Objectives
To review types of economic integration
among countries
To examine the costs and benefits of
integrative arrangements
To understand the structure of the
European Union and its implications for
firms within and outside Europe
To explore the emergence of other
integration agreements, especially in the
Americas and Asia
To suggest corporate response to
advancing economic integration
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Introduction
Economic integration is best
viewed as a spectrum with the
various integrative
agreements in effect today
lying in the middle of this
spectrum
The level of integration defines
the nature and degree of
economic links among
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Levels of Economic
Integration
Trading bloc:
preferential
economic
arrangement
among a group
of countries

Trading blocs
may take
various forms:
Free trade area
Customs union
Common market
Economic union
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The Free Trade Area and

the Customs Union
The free trade
area is the least
restrictive and
loosest form of
economic
integration among
countries
In a free trade
area, many
barriers to trade
among member
countries are
removed

Members of a
customs union
dismantle barriers
to trade in goods
and services
among themselves
A customs union
establishes a
common trade
policy with respect
to nonmembers
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The Common Market and

The creation
of a true
the Economic
Union
economic union
A common market
has no barriers to
trade among
members and has a
common external
trade policy
Factors of
production are
mobile among
members
Members of a
common market
must be prepared to
cooperate closely in
monetary, fiscal,

requires integration of
economic policies in
addition to the free
movement of goods,
services, and factors of
production
Under this union,
members would
harmonize monetary
policies, taxation, and
government spending
and a common
currency would be
used by all members
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Arguments Surrounding
Economic Integration
A number of arguments
surround economic
integration
These arguments center on:
Trade creation and diversion
The effects of integration on
import prices, competition,
economies of scale, and factor
productivity
The benefits of regionalism
versus nationalism
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Trade Creation and Trade

Diversion
Whereas trade creation is
positive in moving toward
freer trade, and therefore
lower prices for
consumers within the EU,
the impact of trade
diversion is negative
Internal firms and
External firms affected
differently which will
yours be? Both maybe?
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Reduced Import Prices

When a small country imposes
a tariff on imports, the price of
the goods will typically rise,
which will in turn result in
lower demand for the imported
goods
When a bloc of countries
imposes the tariff, the fall in
demand for the imported
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Increased Competition
and Economies of Scale
Integration increases market
size and may result in a lower
degree of monopoly in the
production of certain goods
and services
Certain industries may not be
economically viable in smaller,
trade protected countries
(lower output)
Internal economies of scale
External economies of scale
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Higher Factor Productivity

and Regionalism Versus
Nationalism

When factors of
production are
freely mobile, the
wealth of the
common market
countries, in
aggregate, will
likely increase
Factor mobility
will not benefit
each country in
the common

The biggest
impediment to
economic
integration
remains the
reluctance of
nations to
surrender a
measure of their
autonomy
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European Integration
Economic integration in Europe
from 1948 to the mid 1980s:
Organization for European Economic
Cooperation (OEEC)
European Steel and Coal Community
Treaty of Rome ambitious
integration
European Community
European Free Trade Association
(EFTA)
Common agricultural policy (CAP)
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European Integration
The European
Union since the
mid 1980s:
1992 White Paper
Maastricht Treaty
and European
Union (EU)
Monetary Union &
Growth and Stability
Pact
Single undertaking in
security and foreign

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Organization of the EU
The executive body of the EU
is the European Commission,
headquartered in Brussels
The Council of Ministers has
the final power to decided EU
actions
The future expansion of the EU
will cause changes in the
decision making processes
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Implications of the
Integrated European
Market

Perhaps the most important implication

for Europe is the growth of some
members
Several specific sources of increased
growth have been identified:
Gains from eliminating transaction costs
Achievement of economies of scale
More intense competition
Cheaper transaction costs and reduced
currency risks

Many U.S. firms fear a unified Europe

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North American Economic

Integration
Although the EU is undoubtedly the
most successful and well-known
integrative effort, integration efforts
in North America has gained
momentum and attention
North American integration has an
interest in purely economic issues and
there are no constituencies for
political integration
U.S.-Canada Free Trade Agreement
North American Free Trade Agreement
(NAFTA)
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Integration in Latin
America
Before the signing of the U.S.Canada Free Trade Agreement, all
of the major trading bloc activity in
the Americas had taken place in
Latin America
One of the longest lived integration
efforts among developing countries
was the Latin America Free Trade
Association (LAFTA), formed in
1961
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Integration in Asia and

Africas economic
Integration in Africa
and
the
groupings
range
currency
Middlefrom
East
The development
in Asia has been
different from that
in Europe and the
Americas
Asian interest in
regional
integration is
increasing for
pragmatic reasons

unions among
European nations
and their former
colonies to customs
unions among
neighboring states
Countries in the
Arab world have
made some
progress in
economic
integration
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Economic Integration
and the International
Manager
Regional economic integration creates
opportunities and challenges for the
international manager
Economic integration may have an impact
on a companys entry mode
Decisions regarding integrating markets
must be assessed from four different
perspectives
Effects of change
Strategic planning
Reorganization
Lobbying

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